Commercial properties have additional risks that need to be mitigated and in today’s litigious society, it is important for investors to take the steps necessary to protect themselves and their investments. As the housing market begins to cool off, the investment risk of real estate has increased somewhat. Residential and commercial real estate investors can no longer rely on a continually increasing market to bail them out of mediocre or bad purchases. The only real insurance you have here is to study investment analysis further and to really check your market before committing funds to a transaction.

There are other risks in commercial real estate that you can mitigate through third party insurance policies. The most common form is title insurance. Most real estate professionals recommend that buyers obtain title insurance on any property they purchase and if a loan is involved, the lender will make it a condition of obtaining the loan. The purpose of title insurance is to protect the buyer in the event that problems are found with the title after the close. Even though all sales of real estate include a title search, it is a good idea for the buyer to purchase separate title insurance as an extra measure of protection against mistakes in the search.

The important form of insurance for investment property is liability insurance. This provides the investor protection from liability in the event an individual is injured while on the property. It is all too common for individual property owners to be sued for seemingly frivolous reasons, so it is vital for all property owners to carry a sufficient amount of liability insurance to protect themselves and their personal assets. It may also help to have your insurance professional “walk” the property with you to point out potential hazards before they become law suits.

Hazard insurance provides protection in the event of damage from fire, accidents, theft, and vandalism. Depending upon where you live, you might want to look into adding protection from storms and natural disasters. All owners of real estate should have this insurance and again, if a loan is involved, the lender will require you to purchase it and name them as an additional insured.

In addition to these basic forms of real estate insurance there are other types of coverage that you may wish to consider. For instance, those properties located in or near flood zones may wish to purchase flood insurance, while those in earthquake prone regions may want to consider the purchase of additional earthquake insurance. And in the wake of 9/11, there is even the opportunity to purchase terrorism insurance!

In the final analysis, each real estate investor has to look at his or her own level of risk tolerance and what might actually affect the real estate investment. From there, with the help of an experienced commercial hazard insurance broker, you can then purchase the right mix of insurance needed to adequately address and mitigate those risks.

1. You are about ready to purchase a parcel of real estate. Before closing the sale, you have a title insurance company do a preliminary title search to make sure there are no defects in your title. Everything is OK, so you arrange to close the sale as soon as the title insurance company can issue you a policy. The title insurance company does a last-minute search to make sure there haven’t been any changes, closes the sale, and issues you a title insurance policy.

2. The title insurance company finds that the seller’s title is fine, but alas – you are paying for the property with a bank loan, and the bank wants a mortgage on the property in exchange. So tell the closing agent to get you a title policy that makes an exception in its coverage for your mortgage. The bank, meanwhile, will issue the money only when it receives a title policy showing that it has a valid first mortgage on your property. Except for that mortgage, you’re covered against any encumbrances or other title defects on the property.

3. Your title insurance company checks out the seller’s title and discovers that it has a mortgage on it (probably taken out when the seller purchased the property). So make sure that the closing agent closes escrow only when the title insurance company issues a policy that does not list the owner’s mortgage as an exception to its coverage. Of course they’re not gonna do that until the mortgage is paid off, thus putting the ball in the owner’s court. But you can smooth this one over by agreeing with the owner that part of your purchase money be paid to the holder of the mortgage in order to extinguish it. This will clear up the title and cause the title insurance company to issue a policy with no exceptions, clearing the way for you to close the sale on your terms.